SME Financing for Biodiversity: Building Nature Measurement and Impacts into SME Financing (‘SME FinBio’) A Natural Environment Research Council (NERC) funded project, carried out by Middlesex University

Understanding the role of SMEs in delivering gains in carbon reduction and biodiversity enhancements

• Biodiversity is a driver for climate change: protection and restoration of the environment can also mitigate climate change. However, there is no route map for green SME finance in the UK.
• SMEs represent 60% of private sector employees and over half of GDP (BoE, 2020). However, there has been no research on ‘nature positive’ linked financial risk assessment related to SMEs.
• There is massive heterogeneity of SMEs (notably their different sector, materiality and resource bases), making a 'one-size-fits-all' reporting framework difficult.
• Small (<50 employees) and Micro (<10 employees) companies in the UK have exemptions from auditing their financial report and submitting a director’s report to the Companies House, under the FRS 105.
• UK SMEs (< 500 employees) are not currently required to formally report their climate or wider environmental impacts.
• SMEs struggle with the burden of reporting and may lack incentives to consider their biodiversity impacts. UK government is highly cautious concerning additional reporting /‘red tape’.
• Most SMEs are laggards that don't act due to cost and other priorities (BBB/IPSOS SME Survey 2021). Nearly half of UK SMEs are not aware of Government green energy efficiency support programmes (45% of UK - LSBS, 2021).
• Climate and Biodiversity (nature-based) impact reporting are challenges for UK SMEs and their finance markets - public, private, funding insurance risk assessment.
• UK Government financing instruments (e.g. BBB, UKRI) offer only recent and minimal guidance for Climate Change (BBB report, 2021) with no consideration for Biodiversity and potential negative impacts from Climate Change actions.
• UK green growth productivity (Clean Growth Strategy, 2017), Green Finance Strategy (2019) and its Green Finance Institute, pay relatively little attention to SMEs as innovators and innovation adopters.
• As such, SME consideration of and reporting on biodiversity remains virtually non-existent.

There is a call from SMEs and market support services for greater incentivising of green investment. It is important to raise SMEs’ understanding of climate change and specifically biodiversity impacts and the benefits of self-reporting – particularly in higher-risk sectors.